"Shareholder Interests As The Director's Touchstone"
                Remarks by Chairman Arthur Levitt
        United States Securities and Exchange Commission
                       Directors' College
          Stanford Law School -- Palo Alto, California
                         March 28, 1996

     Directors' College is the one opportunity I have each year to
address a unique and important constituency -- directors of
publicly traded corporations.   There is no shortage of
opportunities for me and my colleagues at the SEC to address
lawyers, investment bankers, and consultants, who then turn around
and advise you how to deal with . . . me and my colleagues at the
SEC.  This is a chance to talk face-to-face, as it were, without
intermediaries.  It's also an opportunity for us to exchange ideas
in a constructive environment dedicated to the pursuit of "best
practices."  

     By virtue of your attendance, you have identified yourselves
as directors who care about governance and competitiveness, and who
want to improve boardroom practices -- and for that you all deserve
praise.  By working together, we have the potential to improve
governance, enhance compliance, and increase the competitiveness
and profitability of American industry.

     Let me begin with a confession.  I haven't always been a
regulator.  I used to be a valued and productive member of society. 
I've managed enterprises in a broad range of industries, including
finance, agriculture, and publishing.  I've served on the boards
of more than a half-dozen major public corporations, and I was CEO
of the American Stock Exchange.  I understand the way the world
looks from your perspective, and my experience as Chairman of the
SEC has only convinced me more that you play a vital role in
maintaining discipline among our companies and markets, and in
promoting competitiveness and efficiency in the marketplace.

     You and I share many responsibilities.

     We share a responsibility to investors.

     We share a responsibility to companies.

     We share a responsibility to our markets.

     We share a responsibility to the nation.

     I would characterize the relationship between the SEC and
independent directors as a partnership in the public interest. 
Your supervision complements our oversight -- in fact, the SEC's
abilities as a watchdog pale in comparison with yours. You're in
an ideal position to monitor new developments and trouble-shoot
problems as they arise.  To match you, we would need several
representatives on every board -- something no one would want,
least of all the SEC.

     You have many responsibilities.  But the most important among
them may be setting the tone for the rest of the organization.  

     High standards for integrity in the board room translate into
high standards throughout the enterprise.  It's called leading by
example.  If a board fails to set a standard for integrity,
compliance, and performance, how can it expect as much from its
hourly workers and salaried employees?

     The force of your example in leadership far outweighs any
authority the SEC might wield.  Regulators act when there has been
a transgression of a rule, regulation, or statute.  We have little
to say about the vast majority of corporations whose daily
activities do not violate the rules.

     But it is this legal conduct, away from the edge of the law
and subject only to your good judgment and common sense as
directors, that will as a practical matter determine the
competitiveness and economic future of our nation and its markets.

     Recent years have seen too many examples of companies whose
boards could and should have been doing better jobs.  There are
too many boards that overlook more than they oversee; too many
boards that substitute CEO directives for board initiative; too
many boards that spring not into action but reaction, only after
a crisis strikes.  Such boards do no one a service -- least of all
themselves.

     There's no need to name names -- we're all aware of
corporations that have fallen on hard times, or that have found
themselves in serious legal difficulty, and where one can fairly
ask where was the board?  What kind of tone did they set at the
top?  Were they an active, thoughtful, inquiring group that
exercised prudent oversight?  Or were they a passive, rubber- stamp
of a board, filled with good buddies and old cronies, who  never
pursued a tough question and never rejected an easy answer? 

     When a corporation finds itself in trouble, it often becomes
clear that the board didn't fully discharge its responsibilities. 
What is obvious in hindsight, can be avoided through foresight -
- and that's the goal of Directors' College.

     In the course of these two days, speakers will focus on many
of the critical issues directors face.  But before we wade into
some of these complex questions, I want to share a simple rule of
thumb that has guided me without fail in both private and public
sectors.  I've learned over the years that you'll end up on the
right side of almost any issue you'll confront when dealing with
public companies if you make the interests of shareholders your
touchstone.

     Legions of people already look after the interests of
management, of the industry, of the capital markets, of employees,
and others.  You, however, are uniquely charged with the
responsibility to represent the interests of investors.

     This formula applies even to your decision to accept a
nomination to a board or to remain on a board.  A few basic
questions will give you an idea of the directors' priorities and
degree of commitment to investors.  I don't mean any one of my
suggested standards should be controlling -- every rule has
exceptions.  But if you don't sense the right set of priorities,
or if you sense an inadequate commitment to shareholders, you
should think seriously of not joining the board or, if you're
already on the board, helping change it or resign.   Here are
several important factors to consider:

     How many times a year does the board meet?  I don't care how
talented you are, you can't be a good watchdog if you're only on
patrol 3 times a year.  Clearly, the demands of today's corporate
society call for greater continuity in oversight.

     The commitment of adequate time is an essential requirement
for directors.  By itself, attending half-day board meetings 6 or
8 times a year is inadequate to the demands of corporate service. 
Outside directors serving on committees and attending both special
and regular meetings should contemplate approximately 2 days per
month to understand and respond to the dynamic needs of today's
major businesses.

     How many different boards do the directors serve on
concurrently?  Directors cannot adequately discharge their
responsibilities if their commitments are too extensive.

     What kind of people are on the board, and how did they get
there?  I'd be especially wary if I saw too many board members with
personal or social ties to the CEO. 

     Is the board genuinely diverse?  In recent years, corporate
America has focused on the importance of female and minority
representation in the boardroom.  In a broader sense, one can ask
whether there are foreign directors for an international company
-- or, for a domestic corporation, whether the board is a regional
one or a national one.

     In assessing board diversity, I would emphasize the broadest
meaning of the term.  Each board has a portfolio of skills that
can be brought to bear on various issues.  Two directors with
similar skills, backgrounds and perspectives add less to the
board's portfolio than two directors with complementary but
distinct skills, backgrounds, and perspectives, all working
together for the benefit of the enterprise.

     Here's a key question:  Do board members speak their minds,
or do they march in lockstep with management?  Board independence
is crucial.  One study of 444 companies in the Standard and Poor's
500 found that in 72 percent, independent directors were a
majority. Although that's a healthy sign, the most meaningful
statistic is one we'll never see, and that is the number of
directors who are independent in fact, that is, who are
sufficiently removed from conflicts of interest to be able to take
views without regard to management's interests.

     Is the board conscientious about expenditures and sensitive
to symbolism, or have its members turned imperial, demanding
expensive prerequisites?  Are they more concerned about what they
receive than what they contribute?  The recent focus on and
controversy over board compensation and retirement plans only
underscores the need for boards to pay careful attention as to
whether their pay is reasonable, both in relative terms and in
relation to the corporation's performance.

     Does the board understand where the company has been and where
it is headed?  Is there a plan for the future?  Is management
succession accounted for?  Does the board regularly review and
evaluate the CEO?

     Does the board have a retirement policy?  While mandatory
retirement at a specified age is the traditional way of dealing
with boards that might become overly large or lack vitality, a
better approach may be to combine independent periodic performance
evaluations with the kind of term limits that provide boards a
balance between continuity and turnover.

     These questions are among the first I would ask in evaluating
independence.  But they're only the beginning.  It may sound trite
in this context to say that vigilance is the price of independence
-- but it's no less true.  If you suddenly find yourself with
season tickets on the 50 yard line, you're being seduced.  If you
are swept off by corporate jet to meetings in Hawaii and Nassau,
you're being seduced.  If there's an offer to pay one board member
more than the others, or to give him or her a special contract on
the side, chance are the director is being seduced.  These little
inducements can, over time, lead to far larger problems.

     Independence is a state of mind.  However you arrive at it
and whatever your background, independence is an important
prerequisite for your success.

     Let me now touch briefly on three specific issues facing
directors in 1996: executive compensation, and efforts to link it
to performance; executive replacement, that is, locating a new CEO
before the corporation is in crisis; and compliance, which is to
say keeping your companies on the right side of the law.

     I'm very much in favor of compensation structures that align
the interests of top management and directors more closely with
the interests of investors.  But it's not enough just to follow
the mantra about "pay for performance", because in some instances
performance-based pay can encourage managers to assume excessive
risk, or to pursue short-term strategies that are really not in
the best interest of the company and its investors.

     Pay for performance must be tailored to measure long-term
effectiveness, and must take into account both good and bad
performance.  I consider it a good sign that some boards have been
considering similar questions about their own compensation, and
have started paying directors in equity so that they, too, are
invested in the corporation's long-term success.  Such measures can
do much to inspire confidence among investors and other key
constituencies.

     Obviously, there are limits to what compensation can achieve. 
The board will sometimes learn that, despite the most cleverly
designed incentive program, the problem is not the CEO incentive
structure, but the CEO.  In today's high-pressure market, not every
CEO is up to the job; offering a higher bonus won't create talent
in a CEO who hasn't got what it takes.  This is one of the more
difficult tasks that boards have to face.  The CEO is at least a
colleague, and at best a friend -- but when the match between
company and CEO isn't right, the only responsible course is to
search for a new leader.  

     When you see a board making excuses for a CEO, or papering
over the CEO's deficiencies, warning bells should go off.  The
board's job is not to rationalize, but to govern.  Keeping a poorly
performing CEO in place is simply too expensive for a corporation's
shareholders, employees, and customers.

     There's another thing that can be very expensive for companies
in the long run, and that is giving short shrift to compliance
activities.  I don't expect directors to be involved with day-to-
day matters, but rather to monitor compliance.  There's no lack of
ways for them to do this.

     I'm familiar with one board whose independent members are
organized into two standing committees.  One is concerned with
policy, operations, and administrative matters; and the other with
accounting, auditing, internal controls, and investigative matters
that all come under the rubric of "compliance."

     Although this is a sensible arrangement, I recognize that each
company is unique, and that not all boards can function like this. 
The important point is not the structure -- it's that directors
understand they have a role to play in compliance.

               *              *              *

     I've given you my views on our shared responsibilities to
investors.  I hope I've also given you some ideas and support that
will serve you in good stead when you've left the quiet halls of
Stanford and returned to your boardrooms.

     When you do so, I ask you to remember your critical roles as
shareholders' representatives.

     Remember that you have a constituency, usually numbering in
the thousands.  Every time you sit down at the table with your
fellow directors, thousands of shareholders sit with you.  And
every time you stand up for what's right, even if you think you
may be alone, thousand of shareholders stand with you.

     What's more, the SEC stands with you.  For the actions you
take, and the standards you set, have an impact far beyond any
individual company.  The 52 million Americans who invest in the
market are counting on you and me to look after their interests.

     That's a tremendous show of faith.  We must do everything we
can to be worthy of it.  

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